Asia-Pacific Outreach Meeting on Sustainable Development Financing

MINISTRY OF FINANCE REPUBLIC OF INDONESIA Asia-Pacific Outreach Meeting on Sustainable Development Financing
10-11 June 2014
Djuanda Hall, Ministry of Finance Complex, Jakarta
Session 1: Domestic resource mobilization
Presentation
Domestic Resource Mobilisation through Public Finance:
Some Reflections from Emerging Economies (EMEs) in Developing Asia
by
Rathin Roy
Director, National Institute of Public Finance and Policy, India
June 2014
The views expressed in the presentation/paper are those of the author(s) and should not necessarily be considered as
reflecting the views or carrying the endorsement of the United Nations. This presentation/paper has been issued without
formal editing. Dr. Rathin Roy,
Director
National Institute of Public Finance and
Policy
New Delhi
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A transformational change in the incidence
of global savings in recent years has
important implications for fiscal space in
Developing Asia.
The use of fiscal space for countercyclical
fiscal policy can vary; there are important
lessons to be learnt from Asian Emerging
Market Economies (EMEs).
In large EMEs, it is not automatically true
that the Central Government is more
prudent than Sub-National Governments.
This has implications for optimising fiscal
space.
Section- I
Savings and Fiscal Space
Fiscal space, Savings and Inclusive growth
Figure 1. Gross Domestic Savings(as % of GDP)
Source: World Development Indicators
Fiscal space, Savings and Inclusive growth
Asia has enough savings to finance the growth requirements of the region.
Regional co-operation to maximize the disposition of these savings for
public and private investment then opens up fiscal space for countries to
prudently utilize their current revenues for spending on merit and public
goods for inclusive growth that require increases in current expenditure.
Source: World Development Indicators
Figure2. Total Government Revenue (% of GDP)
The EMEs, as is to be expected, show no congruence, though trends for each taken individually
are stable. China records a secular rise in its revenue GDP ratio. India performs badly on this
score with temporary improvements in good years being reversed in bad years
Source: ADB Database, Country Profiles
Public Expenditure: How varied or common is the fiscal stance?
Figure3. Total Government Expenditure (% of GDP)
In the case of the EMEs China has matched increased revenue GDP ratios with increases in
public spending; the ratio has stayed more or less constant in India and fallen since 2008 in
Indonesia
Source: ADB Database, Country Profiles
Section- II
Fiscal Space and Countercyclical Fiscal Policy
INDIA
Economic
Crisis
National
Elections
Fiscal Stimulus of 4% of GDP introduced in 2008
Impact on Sub-National Finances
Combined
Fiscal Deficit
of 11.4 % of
GDP in 2008
Implications for
India’s debt ratings,
but not as
immediate as was
feared
India’s public debt GDP
ratio declined from 73%
in FY2008 to 66.36% in
FY 2011
Why was this the case?
This was because the tradition of fiscal
prudence for both the Centre and the States set
in place by the 12th Finance Commission
(2004) and reinforced by the 13th Finance
Commission (2010) led to increased fiscal
discipline at the State level. State deficits thus
declined to more manageable levels shortly
after the crisis.
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On the other hand, with inflation at around
10 per cent, the nominal value of GDP
continued to rise faster than the nominal
value of debt.
Thus, debt sustainability ratios stayed under
control.
In addition the low ratio of external debt to
total debt in India and the extremely high
proportion of long-term debt in total debt
meant that debt management was relatively
easy.
Debt sustainability did not threaten India’s
macroeconomic fundamentals; rather the fact
that the fiscal stimulus did not result in the
expected growth response which led to
increasing macroeconomic difficulties for
India and the consequent pressure to reduce
deficits and therefore fiscal space.
CHINA
Economic Crisis
Fiscal Stimulus of 14% of GDP introduced in 2008 and 2009
Fiscal Deficit of
2.3 % of GDP in
2009 > 0.5% of
GDP in 2008
Since then
China’s growth rate
reverted to its 9.6
per cent median
growth rate for the
period 1995-201
Thus, fiscal expansion in China
was accompanied by the
requisite growth payback, thus
ensuring fiscal sustainability
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
In the case of China, the government provided a
massive fiscal stimulus equivalent to 14 per cent of
GDP for FY 2008 and 2009. This included a fiscal
stimulus that is expected to result in a fiscal deficit of
3 per cent of GDP in 2009.
However, China had plenty of fiscal space to begin
with; fiscal deficits had fallen to below 2 per cent of
GDP by 2004 and to less than 0.5 per cent of GDP in
2008; the highest fiscal deficit incurred by China was
therefore just 2.3 per cent of GDP in 2009. Since that
date China’s growth rate reverted to its 9.6 per cent
median growth rate for the period 1995-2011, thus,
fiscal expansion in China was accompanied by the
requisite growth payback, thus ensuring fiscal
sustainability
Thus,
fiscal expansion in China was
accompanied by the requisite growth payback,
thus ensuring fiscal sustainability.
MALAYSIA
Economic Crisis
Fiscal Deficit of
6.7 % of GDP in
2009 > 4.6% of
GDP in 2007
This limited stimulus
had little impact on
growth, or medium term
macro-fiscal policy
Malaysia’s Fiscal
Deficit reduced to 4.8
per cent, median rate
for the period 19952011
To some extent this was necessitated by
worsening debt dynamics, both an increase
in the debt/GDP ratio to over 50 per cent of
GDP in the post crisis period, well above the
1995-2011 median, and an increase in the
ratio of relatively more expensive external
debt to total debt.
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
In the case of Malaysia, there was an extremely short
term fiscal response to the crisis, equivalent to an
increase in the fiscal deficit from 4.6 per cent of GDP
in 2007 to 6.7 per cent of GDP in 2009. But this was a
one year expansion—deficits then reduced down to
4.8 per cent of GDP in 2011 equivalent to the median
fiscal deficit of Malaysia for the 1995-2011 period.
This was necessitated by worsening debt dynamics,
both an increase in the debt/GDP ratio to over 50 per
cent of GDP in the post crisis period, well above the
1995-2011 median, and an increase in the ratio of
relatively more expensive external debt to total debt.
This limited stimulus had little impact on growth, or
medium term macro-fiscal policy
This limited stimulus had little impact on
growth, or medium term macro-fiscal policy
Economic Crisis
of 1998
Fiscal Reforms: Public
financial Management &
Structural changes in
Intergovernmental fiscal
relations. Fiscal rules ( Fiscal
deficit to 3% of GDP;
debt/GDP ratio at 60% of
GDP))
Fiscal deficit of 0.7% of GDP in
2010. Fall in both revenue and
expenditure as % of GDP since
2008. Thus, fiscal stimulus was
not expansionary but involved
stimulating the private sector
through tax cuts and fall in
government/GDP ratio
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INDONESIA
Indonesia’s Fiscal Deficit
reduced to 1.1 per cent,
median rate for the period
1995-2011, concomitant
decline in debt//GDP ratio
2009
fiscal
stimulus
included tax cuts (2/3rd of
stimulus) and expansionary
fiscal policy by increase in
public
spending
and
subsidies.
Indonesia went through a fairly long process
of fiscal reforms.
The fiscal deficit-GDP ratio declined
continuously.
The median fiscal deficit in the 1995-2011
period was therefore a very low 1.1 per cent
of GDP.
Indonesia also had in place a fiscal rule which
limits the fiscal deficit to 3 per cent of GDP
and the ceiling debt-GDP ratio at 60 per cent
of GDP
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Indonesia’s 2009 fiscal stimulus package
involved an expansionary fiscal policy as well
as tax cuts.
Over two thirds of the stimulus came from
tax cuts and the rest through increased
public spending and subsidies.
Chiefly due to inability in increasing public
spending, the 2010 fiscal deficit was 0.7 per
cent of GDP, as against a target of 1.3 per
cent.
As a consequence, both revenues and
expenditures fell as a percentage of GDP from
2008.
Thus in Indonesia’s case the fiscal stimulus
was not expansionary but rather involved
stimulating the private sector through tax
cuts and a fall in the government(G/GDP)
ratio.
Section- III
Fiscal Space and Fiscal Federalism
States
Andhra
Pradesh
Bihar
Gujarat
Kerala
Madhya
Pradesh
Maharashtra
Orissa
Punjab
Rajasthan
Tamil Nadu
Uttar
Pradesh
West Bengal
All GCS
Centre
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2.3
1.9
2.7
3.6
1.0
7.1
3.3
5.2
2.5
5.2
5.7
4.3
1.8
4.1
5.4
3.3
1.8
3.8
2.5
4.7
1.6
1.7
2.2
3.8
1.1
-1.4
2.0
3.1
0.0
-0.1
0.2
2.3
3.1
1.9
6.4
4.7
4.1
2.9
3.7
1.7
6.0
4.1
4.4
3.3
1.7
3.1
4.4
3.1
3.2
2.3
3.7
3.0
6.0
4.7
4.1
1.8
1.3
3.1
3.1
4.6
4.4
3.1
4.4
2.4
2.3
4.0
3.1
0.9
-1.5
2.4
0.7
3.5
1.7
0.3
0.0
0.8
-0.6
1.1
0.5
-0.8
5.3
4.2
3.1
3.71
4.1
6.9
3.4
3.34
3.5
5.3
3.2
3.91
3.2
5.6
3.4
3.91
2.5
5.1
3.0
3.91
8.2
4.8
3.0
3.91
2.7
3.9
1.6
3.91
0.4
3.2
0.4
3.91
Source: Handbook of statistics on Indian economy, RBI
States
Andhra
Pradesh
Bihar
Gujarat
Madhya
Pradesh
Maharashtra
Orissa
Rajasthan
Tamil Nadu
Uttar
Pradesh
Kerala
Punjab
West Bengal
All GCS
Centre
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13 2013-14*(BE)
-0.9
-2.5
-0.6
0.0
-4.1
-0.7
-0.2
-3.1
0.0
-0.3
-1.8
1.6
-0.4
-3.1
1.0
-0.5
-1.9
-0.5
-0.2
0.2
-0.6
-0.1
-1.8
NA
-2.3
-0.1
-2.2
-0.4
-0.9
-3.2
-2.2
-3.3
-0.8
-1.3
-2.1
-0.7
-2.3
0.4
-0.4
-2.4
0.9
-0.7
1.8
0.7
-2.6
0.1
-2.0
-0.3
0.5
-3.2
0.2
-2.6
-0.8
-0.2
-1.7
0.0
-1.2
-0.2
-0.1
-1.2
NA
-0.7
-0.2
-0.1
-1.5
1.7
-0.9
2.2
-0.4
1.8
-1.3
2.2
-0.6
1.4
-1.0
2.6
-0.7
1.0
-1.1
NA
1.4
3.2
-0.5
1.87
2.5
2.7
-0.8
1.87
2.2
4.3
0.0
1.87
2.7
5.4
0.7
1.87
2.3
3.7
0.1
1.87
2.7
2.7
-0.2
1.87
1.7
2.1
0.0
1.87
0.5
0.5
-0.4
1.87
*BE= Budget Estimates
NA= Not Available
States no longer borrow to consume.
Source: Handbook of statistics on Indian economy, RBI
Revenue
Surplus
0 GCS States
1998-99
12 GCS States- Andhra
Pradesh, Bihar, Gujarat,
Kerala, Madhya Pradesh,
Rajasthan, Punjab,
Odisha, Tamil Nadu, Uttar
Pradesh, West Bengal
2004-05
8 GCS States- Andhra
Pradesh, Bihar, Gujarat,
Madhya Pradesh,
Rajasthan, Odisha, Tamil
Nadu, Uttar Pradesh
2012-13
3 GCS StatesKerala, Punjab,
West Bengal
Revenue
Deficit
States have always outperformed the Centre in
keeping its fiscal deficits low since 1981-82 .
Both States and Centre have been running revenue
deficits. However, States have improved their
macro-fiscal position since 2003-04.
Most of GCSs have been running balanced revenue
budgets since 2008-09 (excluding Kerala, Punjab
and West Bengal).
This is as true for rich States like Maharashtra and
Gujarat as for poorer States like Bihar, Orissa and
UP.
The
Centre has for some time not been the
locus for public investment, which is principally
undertaken by the States.
States (as % of GSDP) invest more than the
Centre.
The share of capital outlay in Central Plan has
been shrinking since 2000-01.
Thus, the ‘heavy lifting’ in terms of public
investment is being done by states.



China’s local government debt rose to almost
$3trillion in 2013 (China’s National Audit
Office (NAO) Report,2013).
The NAO’s latest estimate for local
government debt is equivalent to a little more
than 30 per cent of gross domestic product,
compared to 25 per cent of GDP at the end of
2010.
China’s total public debt now stands at 53.3
per cent, with corporate debt estimated at
111 per cent.
•
•
•
•
In large EMEs, it is not automatically true that
the Central Government is more prudent than
the sub-national governments.
Sub-national governments seem to be able to
better deal with fiscal prudence in the face of
interest group pressures than the central
governments.
However, in terms of both equity and
efficiency, major taxes are best collected at
Centre and devolved to sub-national
governments.
Therefore, there appears to be a case for
restructuring the revenue and expenditure
assignment of sub-national governments and
Central government to optimise fiscal space.